2008 and 2009 were great years for mortgage borrowers with variable rate loans. The Bank of England tried desperately to shore up the economy with successive cuts perhaps ending in the historically low rate of 0.5% in March 2009. Past experience shows it is only a matter of time before rates begin to creep up. The Bank of England will keep a wary eye on early indicators of economic recovery with a view to heading off a period of dangerous ‘hyper- inflation.’ The most likely sign of recovery will be an increase to the Consumer Prices Index (CPI), a common indicator of inflation which excludes mortgage interest payments. If the CPI rises above the Bank’s target, then a base rate increase is highly likely.
Mortgage lenders have a habit of second guessing the money markets and pricing in Bank rate rises before they happen. This is not an issue for variable rate borrowers who will continue to enjoy their rate until the Bank of England makes its move. However borrowers looking for a fixed rate mortgage may already be suffering from tentative signs of the economic recovery. Worryingly Nationwide, the UK’s third biggest mortgage lender, increased fixed rate deals in early June closely followed by several other lenders. So what should borrowers do?
I have a variable rate mortgage?
In some respects it is likely that the Bank of England will tread cautiously with rate rises. Despite early signs of recovery the economy remains in a significant recession, with unemployment likely to continue to rise and consumers still tightening their belts. This points to a ‘small and slow’ approach to rate rises. Variable rate borrowers may be able to take advantage of relatively low interest rates for some time to come. Those who have chosen to overpay their mortgage by keeping their monthly repayments the same (despite rate cuts) will be able to absorb future rate increases to a degree. Variable rate borrowers who have increased their outgoings to take advantage of falling mortgage repayments should carefully consider their future budgeting to take account of likely rate rises.
Should I move to a fixed rate?
Variable rate borrowers coming to the end of a discounted rate should ask an independent financial adviser to consider fixed rate options. Borrowers with a redemption penalty are less likely to benefit from jumping ship to a fixed rate. However those with ‘relatively’ large loans might wish to consider this. If you feel you might be in this category, or want to explore the different options, consult an independent financial adviser.
As with most mortgage products the best deals are reserved for those with the largest deposit or equity. Loans of less than 60% of your property value will command the best deals. Indeed it is unlikely that a re-mortgage will not be feasible without at least 10% equity in your property.
What if I am a first-time buyer?
A big deposit is “King” and First-time buyers will need a deposit of at least 10% or preferably more. Those looking to buy may face a dilemma of rising house prices, before they can save a sufficiently large deposit. Often it can be worth approaching the bank of Mum and Dad to supercharge your deposit.
Dentists within two years of becoming self-employed will hit a brick wall with most lenders. Very few lenders accept less than two years trading accounts as evidence of income. Advice from a specialist independent financial adviser, dealing regularly with dentists, can be invaluable here. A suitably qualified adviser should be able to advise on lenders with concessions for dentists in this position. First-time buyers might also consider using a suitable ‘guarantor’ as a possible solution to the problem. Again professional independent advice is important here.
Fixed or variable?
All borrowers should carefully consider affordability and be wary of the historically low level of interest rates. When discussing this with clients we often apply a ‘stress test’ criteria to consider the ‘what ifs’ of rate rises. Without making any predictions, I suggest now might be a good time to consider: ‘what if rates increased by 2-3% or even more over the next 2-3 years’.
An independent mortgage adviser should provide you with the most suitable mortgage recommendation. This may not always have the lowest initial interest rate. A fixed rate might mean higher monthly repayments, when compared to the best variable rate but can be invaluable for borrowers at the limit of their budget. For those with sufficient spare capacity in their monthly budget variable rates are currently hard to resist. Your adviser should guide you on the most competitive interest rates, both fixed and variable that suits your particular needs.
Jon Drysdale is a qualified mortgage adviser, an Indepenendent Financial Adviser and a Director of Practice Financial Management Ltd (PFM) an ASPD member.